Insurance can seem intimidating. It doesn’t have to be. Check out our quick guide for everything you need to know about life insurance and how it works.
Most people view life insurance as a necessary evil. That’s because we’ve been led to believe it’s a daunting decision, where you have to choose between living in the moment or worrying about what will happen when life insurance kicks in – an uncomfortable exercise at best.
But what if we told you it doesn’t have to be that tough? Just hear us out.
Life insurance protects your family against a loss of income when you die, but it also makes good sense to buy it when you’re healthy and thriving.
Not only can life insurance help you pay down your mortgage and cover your debt, but at Walnut, it can benefit your day-to-day life (yes, while you’re alive!), so you can enjoy the things that matter to you most with peace of mind about your financial security.
Protecting the people you love and the things you work hard for are a key part of financial planning. So hitting major milestones like getting married, starting a family or business, and buying a new house are all reasons to look into life insurance.
Here’s everything you need to know about life insurance in five minutes.
Like car insurance, life insurance is a type of contract where you agree to pay monthly premiums to cover your risk of dying over a period of time. If you pass away during that period, your insurance company will pay out a death benefit to your beneficiaries (those you name as recipients).
However, there are certain types of risks that insurance companies won’t cover, such as non-insured hobbies (like skydiving). At a basic level, life insurance is split into two different options: term life vs. permanent life.
Who you name as a beneficiary – or recipient of your insurance payout – is totally up to you. The most common beneficiaries are your spouse, business partner, or family members like parents, children, or siblings.
While some insurance companies have limits on how many beneficiaries you can list, most policyholders choose a primary and secondary beneficiary, where they’ll assign portions of the benefit to split up.
If you have children written into your insurance policy who are under 18 at the time of your death, they won’t receive the payout until they reach the legal age. Until then, your insurance company holds onto the payout.
If you outlive the period of your insurance policy, you can either extend your coverage by adding on additional years or buying a new policy. Either way, updating your term will usually result in a higher monthly premium because you’re alive longer than expected and are older, maintaining more risk.
Death benefits don’t typically automatically kick in from a life insurance policy when the insured person dies.
When an insured person dies, the beneficiaries named have to file a claim with the insurance company to receive their payout. To claim the payout, you’ll need to show the insurance company your loved one’s death certificate. Most claims are paid out in a couple of weeks, but this process can take longer depending on the company.
But what if you don’t know if you’re a beneficiary? How will you find out?
Most of the time, the insured will tell you since you have a relationship with them, but sometimes policyholders don’t get the chance to share those details.
Generally, insurance companies will inform you when the policyholder has died, but there are many ways to check, such as asking other family members, searching for the insurance policy, and sorting through the deceased’s paperwork (assuming you have the authority to do so).
Generally speaking, as a beneficiary, you don’t need to pay taxes on the money you receive from a death benefit, since it’s not recognized as taxable income by the government.
However, there are some scenarios where you may be taxed:
Beneficiaries can choose from a range of options to receive their insurance payout.
Life insurance is also a powerful financial tool that most of us underestimate.
Working life insurance into your financial plan as early as possible can help you fill a financial void in the lives of your loved ones after you pass away. That’s why we recommend having these conversations with your beneficiaries while you’re alive to ensure they understand what their options are.
At Walnut, we make life insurance easy with our transparent subscription plans, instant coverage, and holistic benefits that support your daily life.